DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

WASHINGTON, D.C. 20005 -- 202-347-2624 -- FAX 202-347-4631

Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, September 1, 1998

policies, but they are unsure whether these same people will be in their positions in the days ahead. Due to the heightened political uncertainty, CLINTON plans to meet with various leading Russian politicians on Wednesday which will include Federation Council speaker Yegor STROYEV, Duma speaker Gennady SELEZNYOV, Moscow mayor Yuri LUZHKOV, Tatarstan President Mintimer SHAIMIYEV, Krasnoyarsk region governor Alexander LEBED, Communists leader Gennady ZYUGANOV, Our Home Is Russia leader Alexander SHOKHIN and Yabloko leader Grigory YAVLINSKY. These meetings will take place at the US Ambassador's residence in Moscow. ZYUGANOV plans to tell CLINTON, "about what is actually going on in Russia."

Re-nominated Chernomyrdin Continues Work

· Russian President Boris YELTSIN Monday re-nominated Viktor CHERNOMYRDIN as the country's prime minister, hours after the nomination was rejected by the Russian State Duma. Only 94 deputies voted for CHERNOMYRDIN, far below the required 226 votes out of 450 lawmakers. Of the 345 deputies who cast votes 251 voted against, with no abstentions. Presidential spokesman Sergei YASTRZHEMBSKY said the President was unaffected by the rejection and still "fully backs" CHERNOMYRDIN. YELTSIN said, "the first try has failed. But this is my candidate, and I will insist on it." The President stressed the need for the soonest possible confirmation of the prime minister because, "every

Russian Federation

Politics

US- Rus Summit: No Great Expectations

· Two wounded presidents met today amidst a devastating economic downfall and a political power struggle. Russian President Boris YELTSIN greeted US President Bill CLINTON in the Kremlin. Billed as the non-summit with no great expectations or accomplishments, the leaders are expected to discuss the economic crisis. CLINTON is expected to press a message of support but no financial help. CLINTON speaking at a Russian school said, "Your country is going through some difficult changes right now and I know things are not always easy for a lot of people. But I also know that in times of crisis, the Russian people have always risen to the occasion with courage and determination." He added that students must create a new Russia and that the nation must not revert back to past policies which failed. Secretary of State Madeleine ALBRIGHT took a harsh tone explaining that Russia cannot expect more international aid unless it sticks to the reforms that will produce a free market economy. YELTSIN promised CLINTON that Russia would not back down from reforms.

CLINTON and YELTSIN on Wednesday plan to sign accords which will reduce each country's plutonium stockpile by 50 metric tons and will provide mutual access to early warning information of possible missile attacks. The sides will agree to utilize part of weapons-grade plutonium produced in Russia and the US by producing oxide fuel from it, using it in power-generating nuclear reactors, converting it to a form that cannot be used in weapons and disposing the nuclear material.

Many US politicians accompanying CLINTON are meeting with their acting counterparts to discuss

Today's News Highlights

Russia

Banks Face Sanctions

G-& Urge Economic Reforms

McDonald's To Stay Open

European Republics

Parliament Opens New Session

EFF Loan Still Delayed

South Caucasus & Central Asia

Kakabadze To Be Rus. Ambass.

Kazakhstan Finances Are Stable

Turkmen-China Talks On Gas

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day we waste means millions [of rubles] in losses. This is a lost day for the country. This is a lost day for people. We should know this." YELTSIN said he was not going to dissolve the Duma and plans to reach a compromise with deputies, if "they behave themselves." He did not reveal details of a possible new compromise. Leader of the Communist Party Gennady ZYUGANOV, who refused to sign on to the first compromise, protested against the appointment of CHERNOMYRDIN saying, "What has been going on in the country for seven years under the disguise of economic reforms is now lying in ruin. The main cause is the [cabinet's] policy, the absence of basic governance and a total lack of responsibility among the country's rulers."

The Duma speaker Gennady SELEZNYOV said the Duma is set to reconsider CHERNOMYRDIN in a vote next Monday. He doubts CHERNOMYRDIN will be approve in the second vote. SELEZNYOV said the repeated consideration of CHERNOMYRDIN's candidature, "causes much concern of deputies." He added that, "undoubtedly several candidates should be considered." Opposition groups want tot present YELTSIN with their own candidates for prime minister, including Federation Council speaker Yegor STROYEV, Moscow Mayor Yuri LUZHKOV, and Industry and trade Minister Yuri MASLYUKOV. Last March, when YELTSIN nominated Sergei KIRIYENKO as Prime Minister, it took three times for the Duma to approve him. This round, time is of the essence and election threats may not have a strong impact on deputies. In the next few days, CHERNOMYRDIN is scheduled to hold a series of consultations with members of the Federation Council, which is composed of regional leaders. CHERNOMYRDIN is expected to present YELTSIN with a list of people to serve in his Cabinet

Economy

Ruble = 10/$1.00 (NY rate)

Ruble = 10.8833/$1.00 (CB rate)

Banks Face Sanctions For Delays

· Acting Prime Minister Viktor CHERNOMYRDIN's government has threatened to impose sanctions against commercial banks that fail or delay settling client payments. It has ordered the Federal Tax Service, Tax Police, and the Central Bank to closely monitor bank transactions and report banks that

refuse to carry out client transactions in a timely fashion, limit withdraws from deposit accounts, or delay payment transfers to the state budget. Banks that fail to settle payments on time risk losing their banking licenses. Many banks, experiencing a severe liquidity crisis, have merged together with other banks. An analyst at Moody's Investors Service Elizabeth JACKSON-MOORE said, "It has been positive to see proposed mergers, or at least greater cooperation. Institutions one might never have expected to, are coming together. Last week, Uneximbank, Menatep, and Most Bank agreed to create a holding company that resembles a close alliance rather than an outright merger. National Reserve Bank, Inkombank, Avtobank, Mezhkombank, and Alfa Bank also formed a banking group. JACKSON-MOORE also notes that, "Clearly, the longer we [Russia] go without having a proper government, the longer it will take to tackle the problems of banking and the economy." A weak government means that key restructuring measures for the banking sector will be delayed.

Russia's state-controlled Savings Bank Sberbank today in all regions except Moscow raised annual interest rates from 16 to 22 percent and rates on pensions deposits from 25 to 30 percent. In Sberbank's Moscow branches, the rates have been raised from 16 to 25 percent and from 26.4 to 33 percent, respectively. The ruble lost 15 percent as it dropped to 9.331 rubes to the dollar on Monday. The black market is selling rubles at a weak exchange rate of 11.1 rubles to the dollar.

G-7 Leaders Urge Economic Reforms

· The Leaders of the Group of Seven (G-7) leading industrial nations have pledged to encourage Russia to press ahead with its economic reforms. This weekend German Chancellor Helmut KOHL telephoned US President Bill CLINTON, British Prime Minister Tony BLAIR, and Russian President Boris YELTSIN. KOHL underlined that Russian cannot expect financial help from the International Monetary Fund (IMF) or elsewhere without implementing promised reforms. The German government stated the next $4.8 billion installment of the IMF loan hinges on revising the IMF reform program to reflect the recent financial turmoil. KOHL stressed that stability and the continuation of political and economic reforms were, "of fundamental importance for development

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in Europe and the world," the Financial Times reported. CLINTON said, before departing for meeting with YELTSIN, that a return to Soviet-style economic polices would fail and could force Russia to sell nuclear weapons on the world market for necessary funding. BLAIR said, "There is a clear feeling among the G-7 leaders that it is in all our interests to make sure Russia gets through this crisis and it will best do so by sticking to the reform path." He noted that any new assistance from G-7 nations would be tied to the continuation of economic reforms.

China Provides $540M In IMF Aid

· Chinese Foreign Ministry spokesman ZHU Bangzao said Beijing is, "deeply concerned" about instability in Russia. China has called on Russia to quickly stabilize its economy and put an end to political turmoil before the chaos threatens bilateral ties. "As friendly neighbors, we hope that Russia will remain stable and the Sino-Russian relationship will further develop," he said. ZHU said that China has pledged $540 million in financial assistance through the International Monetary Fund. It is not clear whether China's contribution is part of a previous package or will go toward a future Russian bailout.

Business

McDonald's To Weather Ruble Crisis

· McDonald's Corporation stated that despite the crisis situation in Russia's economy it is committed to keeping all McDonald's restaurants in Russia open. They predict that they will not have shortages of customers. McDonald's representative to Moscow Mike GORDON said the company's restaurants will continue to operate as usual. He said there have been no major changes to McDonald's restaurants, except for an increase in prices. The price of a Big Mac rose last week from 13 to 15.5 rubles. GORDON said McDonald's is closely following the situation in Russia. McDonald's has 39 restaurants in Russia, half of which are in Moscow. The company's 40th restaurant is expected to open early this month. GORDON says that the company is certainly not going to pull out because of the devaluation of the ruble. He said, "We are here to stay."

sion today. The parliament's priorities are the payment crisis, budget deficit, and the sliding of the Ukrainian currency gryvnia. The parliament and the Ukrainian Union of Industrialists and Entrepreneurs are expected to have a joint meeting in September to discuss industrial, financial and credit policies, Itar-Tass reported. Parliamentary experts do not rule out that the parliament will insist on urgent changes to the governmental program in the wake of Ukraine's economic deterioration. The left-wing opposition is expected to urge Ukraine to join the CIS Inter-parliamentary Assembly.

IMF-Kuchma Discuss EFF Loan

· Ukrainian President Leonid KUCHMA held a telephone conversation with IMF managing director Michel CAMDESSUS on Monday to discuss cooperation between Ukraine and the International Monetary Fund (IMF). They discussed the $2.2 billion Extended Finance Facility (EFF) loan for Ukraine. CAMDESSUS said that IMF supports Ukraine's efforts to stabilize the economic situation in the country. The first, $200 million tranche is expected to be released this month. However, the IMF is holding off on any decision for at least two days. Ukraine desperately needs the IMF funds to replenish its hard currency reserves. Later in the day, KUCHMA met the heads of major banks to discuss the situation on the currency market in light of the international financial crisis. The President stressed the need to create favorable conditions for foreign investors and creditors in Ukraine. The chief bankers said they are taking measures to ensure the normal operation of exchange offices, including in transactions with the Russian ruble. One US dollar traded on Kiev's exchange rate for 2.46 to 2.50 gryvnias. The National Bank set the ceiling of the gryvnia's exchange rate at 2.25 gryvnias for one US dollar until the end of this year.

South Caucasus & Central Asia

Georgia Nominates New Rus. Ambassador

· Georgia's parliament opened its Fall session today. In the first week of sessions, the parliament will address a package of bills, including the appointment of Georgia's new ambassador to Russia. Intercon sources report that Georgian President Eduard SHEVARDNADZE will nominate deputy foreign minister Malkhaz KAKABADZE as ambassador. Former

European Republics

Ukraine Parliament Opens New Session

· The Ukrainian parliament opened its Fall ses

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ambassador Vazha LORDKIPANIDZE, who was in the post from January 1995 to July 1998, a month ago was appointed as State Minister, the second most important post after the president.

Kazakhstan Finances Stable

· At the opening of Kazakhstan's parliament today, Kazakhstan President Nursultan NAZARBAYEV attempted to calm the nation and foreign investors by saying that Kazakhstan is surviving the financial crisis in South East Asia and Russia. He said the crisis should not deter those who are interested in investing in Kazakhstan's economy. NAZARBAYEV said Kazakhstan should not be identified with the entire post-Soviet expanse and urged deputies of the parliament to work constructively. He noted the, "The financial-credit and monetary system of Russia and Kazakhstan were separated a long time ago. They are not related. We act and work absolutely as sovereign states recognized throughout the world." However, Russia is still Kazakhstan's most important trading partner, accounting for 31 percent of all Kazakhstan's exports during the first half of 1998 and 42.5 percent of imports. Russian President Boris YELTSIN and NAZARBAYEV telephoned each other Monday over preparations for YELTSIN's visit, scheduled for September 8th to 10th.

Some multinational companies, which have invested billions of dollars worth of hydrocarbon reserves, have criticized the government for failing to introduce market reforms and making arbitrary decisions harmful to their investments. NAZARBAYEV said, "We need to support investors who are working in Kazakhstan. Of course, they need to fulfill their contractual obligations, and act according to our laws." Kazakhstan Prime Minister Nurlan BALGIMBAYEV said the rate of the national currency remains unchanged. The inflation rate dropped since last year from 7.5 percent to 3.4 percent. Investment into Kazakhstan's economy over seven months made up 83 billion tenge (about $1.6 billion). Kazakhstan's external debt does not exceed 12 percent of the gross domestic product, the prime minister said. "There is

no reason for concern, just as there is no reason to make comparison between Russia and Kazakhstan," BALGIMBAYEV said.

Turkmen-China Talks Focus On Pipelines

· Chinese President JIANG Zemin and Turkmen President Saparmurat NIYAZOV ended talks on Monday by signing a joint declaration on the strengthening of bilateral relations and cooperation in the areas of air links, education, science, technology and tourism. The two leaders discussed regional security, measures to fight separatism, the situation in Afghanistan and Tajikistan and the Taiwanese issue. JIANG said that China will support Turkmenistan's efforts to defend its sovereignty, ensure stability and the economic growth. He also said that Turkmenistan should select an, "socio-economic development in accordance with the realistic conditions in one's own country, while preserving internal stability." NIYAZOV believes China is wise in adopting a policy of treating small countries like Turkmenistan as an equal. The focus of the talks revolved around the development of a 6,700 kilometer gas pipeline from Turkmenistan to China and then possibly on to Japan. Further development on this pipeline, which involves China National Petroleum Corp., Japan's Mitsubishi and the US Exxon, has been delayed due to "less than ideal" results of a preliminary feasibility study, according to a Mitsubishi Corp. executive. The participants are working on another feasibility study, but the deal is now not expected to be signed until July or August, 1999. The estimate cost of the project is $12 billion. Turkmen oil and gas enterprises are repairing and improving their facilities with the assistance of Chinese workers and experts. Textile industries of the two countries have established close cooperation. Six Chinese or Sino-Turkmen enterprises are registered in Turkmenistan. NIYAZOV extended an invitation for JIANG to visit Turkmenistan in the near future. In 1997, bilateral trade between the two countries exceeded $50 million. NIYAZOV leaves for Shenzhen, one of China's Special Economic Zones, today to continue his six-day state visit to China.

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $895.00 per year. A discount is

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